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Wary green-tech venture investors shift gears

Applying the venture capital model of IT onto energy isn't working, which is something many clean-tech venture capitalists will learn the hard way, say experts.

BOSTON--Green tech has been a hot venture capital investment category the past few years, but that doesn't mean investors are actually earning money. In fact, some venture capitalists eyeing gold in green may soon be moving on, a panel of investors said here on Friday.

In the third quarter this year, green tech garnered more venture capital than the traditional categories of software and biotech, bouncing back after a sharp drop-off earlier this year. That reflects the high level of confidence that investing in energy-related technologies makes sense in the long run.

But there's a growing understanding that applying the same venture model used for biotech or IT won't always work in energy, said speakers at a panel on venture capital at the Fifth Annual Clean Energy Conference.

"Clean tech is broadly recognized as an area of expansion," said Issam Dairanieh of BP's alternative energy venture capital arm. "But those who went into it because it looked sexy will suffer. Those who went into it without doing their homework will go away."

The two most dramatic differences between IT and energy technology is the amount of time required to build a product and the capital that's needed. A product could take 15 to 18 years to enter into the fuels business and cost tens or hundreds of millions of dollars to develop, said Dairanieh. The traditional venture model is built around getting sizable returns in five to seven years.

"Venture capital in clean tech as currently practiced will not be successful or last very long," said Matthew Nordan, a vice president at venture-capital company Venrock. Venrock is focusing on very early-stage companies with an eye toward finding one that can have a technology breakthrough over many years, Nordan said.

The panelists said that the best VC investors are patient and invest for the long term. But there are many investors who chase fads, said Bic Stevens of Stevens Capital Partners. "Most VC returns are made by getting ahead of a bubble," he said.

Right now, many venture capitalists in green tech are focusing on the companies they have already invested in to ensure that they succeed, a situation that makes it more difficult for newly formed start-ups to secure funding. IT-heavy areas, such as smart grid, are also getting more attention in part because they can be businesses that IT investors feel comfortable with.

"Venture capital in clean tech as currently practiced will not be successful or last very long."
--Matthew Nordan, Venrock VP

The shift to later-stage venture investments was clear in an analysis of third quarter venture capital done by Ernst & Young. For the first nine months of the year, 62 percent of the companies that received funding were already shipping products, compared to 37 percent for the same period last year.

BP's Dairanieh said that despite some limitations, there is an important role for venture capitalists to play in developing very specific technologies. For example, a biofuel company can develop a process for converting algae to fuel, but a small company should expect to bring it to market by partnering with established companies, such as refiners and distributors.

Another heavy presence in energy investing is Washington, with billions of dollars in stimulus money and research funding being put toward energy. Over the past year, many start-ups have applied to Department of Energy programs with a hope of getting a grant or loan.